How are income and expenses classified into operating, investing and financing categories under IFRS 18?

Under IFRS 18 Classification of Income and Expenses (effective 1 January 2027, replacing IAS 1), all income and expenses recognised in profit or loss must be classified into one of five categories — operating, investing, financing, income taxes, or discontinued operations — with the operating category acting as the residual catch-all for items not meeting the definition of any other category. - Operating category (residual): Captures all income and expenses that do not belong to investing, financing, income taxes, or discontinued operations (IFRS 18.60). For most entities this is the largest category and includes revenue, cost of sales, distribution costs, and administrative expenses. There is no positive definition — it is defined by exclusion. - Investing category: Includes income and expenses from assets that generate a return largely independently of the entity's main business activities (IFRS 18.48). Key items include dividends received, interest received on cash and investments not integral to the business, and gains/losses on disposal of investments and property, plant & equipment. For a bank or insurer, these items typically move to operating instead (IFRS 18.53–54). - Financing category: Encompasses income and expenses from liabilities that represent a source of financing for the entity's activities (IFRS 18.55). This includes interest expense on borrowings, the unwinding of discount on provisions, and the net interest on defined benefit liabilities/assets (IAS 19 cost). Crucially, interest on lease liabilities under IFRS 16 also falls here (IFRS 18.55(b)). - Integral vs. non-integral assets/liabilities: The standard introduces the concept of "integral" — if an asset or liability arises directly from transactions with customers or suppliers in the main business, related income/expenses belong in operating, not investing/financing (IFRS 18.50–51). A manufacturer's trade receivable interest income is operating; a bond portfolio interest income is investing.

How does IFRS 18's 'integral' concept change the classification of interest income for banks and financial institutions compared to manufacturing entities?

- Presentation of subtotals: Entities must present, at minimum, an operating profit subtotal in the statement of profit or loss (IFRS 18.68). This is a major change from IAS 1, where the operating subtotal was optional in practice. The investing and financing income/expenses then follow before arriving at profit before tax. - Disclosure of management-defined performance measures (MPMs): If an entity publicly communicates a non-GAAP subtotal that is derived from the statement of profit or loss (e.g., "adjusted EBITDA"), IFRS 18 requires that measure to be labelled an MPM and reconciled with the closest IFRS line item (IFRS 18.B1–B10). Consider Hurst Manufacturing SA for the year ended 31 December 2027: - Revenue: €10,000k; Cost of sales: €6,000k - Interest on a bond portfolio held as liquidity reserve: €120k - Interest expense on bank loan: €180k - Gain on disposal of an old press machine: €90k Classification: | Item | Category | |---|---| | Revenue / Cost of sales | Operating | | Bond interest received | Investing | | Gain on press disposal | Investing | | Bank loan interest expense | Financing |

What specific disclosures are required for Management-defined Performance Measures (MPMs) under IFRS 18.B1–B10, and how do they differ from existing non-GAAP reconciliation practice?

Journal entry — accrual of bank loan interest (financing category): | Account | Dr (€k) | Cr (€k) | |---|---|---| | Finance costs — financing (P&L) | 180 | | | Accrued interest payable | | 180 | The operating profit subtotal presented in the statement of profit or loss would be €4,000k (10,000 − 6,000), before the investing category items (net +€210k) and financing costs (−€180k), yielding profit before tax of €4,030k. - Misclassifying integral financial instrument income as investing: A retailer that provides customer financing (e.g., hire-purchase receivables) earns interest that is integral to its main activities — this is operating, not investing. Applying the investing definition without the integral test is a frequent preparer error (IFRS 18.50–51). - Forgetting that lease interest is financing, not operating: Under legacy IAS 1 practice, many entities lumped IFRS 16 interest into operating costs. IFRS 18 mandates the interest component of lease liabilities in the financing category (IFRS 18.55(b)), which will mechanically reduce reported operating profit for lease-heavy businesses such as retailers and airlines.

How will IFRS 18's mandatory operating profit subtotal affect leverage and profitability KPIs for lease-heavy industries such as aviation and retail under IFRS 16?

- Treating the operating subtotal as optional: Unlike IAS 1, the operating profit line is now a mandatory subtotal under IFRS 18.68. Auditors will challenge statements that omit it or define it inconsistently with the standard's residual approach. - IFRS 18.48–54 — Definition and scope of the investing category, including the integral asset concept. - IFRS 18.55–59 — Definition and scope of the financing category, with specific inclusion of IFRS 16 lease interest. - IFRS 18.60 — Operating category as the residual classification. - IFRS 18.68 — Mandatory operating profit subtotal in the statement of profit or loss. - IFRS 18.B1–B10 — Management-defined performance measures (MPMs) disclosure requirements.

IFRS 18 Classification of Income and Expenses

IFRS 18 Classification of Income and Expenses — Core Rule

Under IFRS 18 Classification of Income and Expenses (effective 1 January 2027, replacing IAS 1), all income and expenses recognised in profit or loss must be classified into one of five categories — operating, investing, financing, income taxes, or discontinued operations — with the operating category acting as the residual catch-all for items not meeting the definition of any other category.

How IFRS 18 Classification of Income and Expenses Works

Operating category (residual): Captures all income and expenses that do not belong to investing, financing, income taxes, or discontinued operations (IFRS 18.60). For most entities this is the largest category and includes revenue, cost of sales, distribution costs, and administrative expenses. There is no positive definition — it is defined by exclusion.

Investing category: Includes income and expenses from assets that generate a return largely independently of the entity's main business activities (IFRS 18.48). Key items include dividends received, interest received on cash and investments not integral to the business, and gains/losses on disposal of investments and property, plant & equipment. For a bank or insurer, these items typically move to operating instead (IFRS 18.53–54).

Financing category: Encompasses income and expenses from liabilities that represent a source of financing for the entity's activities (IFRS 18.55). This includes interest expense on borrowings, the unwinding of discount on provisions, and the net interest on defined benefit liabilities/assets (IAS 19 cost). Crucially, interest on lease liabilities under IFRS 16 also falls here (IFRS 18.55(b)).

Integral vs. non-integral assets/liabilities: The standard introduces the concept of "integral" — if an asset or liability arises directly from transactions with customers or suppliers in the main business, related income/expenses belong in operating, not investing/financing (IFRS 18.50–51). A manufacturer's trade receivable interest income is operating; a bond portfolio interest income is investing.

Presentation of subtotals: Entities must present, at minimum, an operating profit subtotal in the statement of profit or loss (IFRS 18.68). This is a major change from IAS 1, where the operating subtotal was optional in practice. The investing and financing income/expenses then follow before arriving at profit before tax.

Disclosure of management-defined performance measures (MPMs): If an entity publicly communicates a non-GAAP subtotal that is derived from the statement of profit or loss (e.g., "adjusted EBITDA"), IFRS 18 requires that measure to be labelled an MPM and reconciled with the closest IFRS line item (IFRS 18.B1–B10).

IFRS 18 Classification of Income and Expenses — Practical Example

Consider Hurst Manufacturing SA for the year ended 31 December 2027:

Revenue: €10,000k; Cost of sales: €6,000k
Interest on a bond portfolio held as liquidity reserve: €120k
Interest expense on bank loan: €180k
Gain on disposal of an old press machine: €90k

Classification

Item	Category
Revenue / Cost of sales	Operating
Bond interest received	Investing
Gain on press disposal	Investing
Bank loan interest expense	Financing

Journal entry — accrual of bank loan interest (financing category)

Account	Dr (€k)	Cr (€k)
Finance costs — financing (P&L)	180
Accrued interest payable		180

The operating profit subtotal presented in the statement of profit or loss would be €4,000k (10,000 − 6,000), before the investing category items (net +€210k) and financing costs (−€180k), yielding profit before tax of €4,030k.

IFRS 18 Classification of Income and Expenses — Common Pitfalls

Misclassifying integral financial instrument income as investing: A retailer that provides customer financing (e.g., hire-purchase receivables) earns interest that is integral to its main activities — this is operating, not investing. Applying the investing definition without the integral test is a frequent preparer error (IFRS 18.50–51).

Forgetting that lease interest is financing, not operating: Under legacy IAS 1 practice, many entities lumped IFRS 16 interest into operating costs. IFRS 18 mandates the interest component of lease liabilities in the financing category (IFRS 18.55(b)), which will mechanically reduce reported operating profit for lease-heavy businesses such as retailers and airlines.

Treating the operating subtotal as optional: Unlike IAS 1, the operating profit line is now a mandatory subtotal under IFRS 18.68. Auditors will challenge statements that omit it or define it inconsistently with the standard's residual approach.

IFRS 18 Classification of Income and Expenses — Key Paragraphs

IFRS 18.48–54 — Definition and scope of the investing category, including the integral asset concept.
IFRS 18.55–59 — Definition and scope of the financing category, with specific inclusion of IFRS 16 lease interest.
IFRS 18.60 — Operating category as the residual classification.
IFRS 18.68 — Mandatory operating profit subtotal in the statement of profit or loss.
IFRS 18.B1–B10 — Management-defined performance measures (MPMs) disclosure requirements.